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Qantas-British Airways merger has the ingredients for success

3-Dec-2008
Qantas CEO, Alan Joyce
Qantas CEO, Alan Joyce
  • Qantas-BA deal seeks to address the toxic revenue/cost environment, rising competition and the unprecedented opportunity to create a global carrier;
  • Significant regulatory hurdles lie ahead;
  • CEO 'X Factor' could be key to outcome.

Qantas has confirmed media speculation it is negotiating a merger with its long-time partner, British Airways (BA). Though talks are at an early stage, Qantas has revealed a potential structure centres on a company dual-listed in London and Sydney, with two boards and separate brands, but one set of directors and a single balance sheet.

BA was a cornerstone 25% investor in the 1995 float of Qantas (adding significant value to the Australian airline's subsequent IPO), but BA sold its (reduced) stake in Qantas in Sep-04. More than a decade on, Qantas appears to be returning the favour, with BA shares leaping 12.5% yesterday on the news (its biggest daily increase since 2002), while Qantas shares have added approximately 5% in Sydney today (midday).

The potential Qantas deal adds to BA's complex web of other merger negotiations involving Iberia and American Airlines. Any or all of these deals are massive undertakings and are a direct response to the toxic environment airlines face with rising costs and falling revenues, but also the unprecedented opportunity to create a global carrier as ownership and control and access restrictions ease around the world. In this regard, BA is also moving to counter the threat posed by the expanding influence of the acquisitive Lufthansa and Air France-KLM groups.

British Airways - The World's (Shrinking) Airline

BA and Qantas also have to contend with fast-growing entrants, likes of Emirates, which has catapulted into fifth place on the list of the world's largest international airlines (by RPKs, as at 2007). British Airways is actually 2% smaller than it was in 1997, while Qantas has left the Global Top 10 altogether.

Then and Now: Global Top 10 airlines by traffic (RPKs): 1998 vs 2007

International

1998

2007

Rank

Airline

Millions

Airline

Millions

1

British Airways

112,365

Air France

118,112

2

United Airlines

75,170

Lufthansa

116,838

3

Lufthansa

70,051

British Airways

110,320

4

Air France

65,955

Singapore Airlines

90,901

5

Japan Airlines

62,018

Emirates

90,530

6

American Airlines

58,288

American Airlines

81,324

7

Singapore Airlines

57,737

United Airlines

77,709

8

KLM

57,271

Cathay Pacific

74,987

9

Northwest Airlines

48,319

KLM

74,488

10

Qantas

42,731

Delta Air Lines

63,202

 

 

 

 

 

Domestic

1998

2007

Rank

Airline

Millions

Airline

Millions

1

Delta Air Lines

126,266

American Airlines

141,437

2

United Airlines

125,251

Southwest Airlines

116,385

3

American Airlines

116,961

United Airlines

114,224

4

Northwest Airlines

59,083

Delta Air Lines

103,008

5

US Airways

59,058

Continental Airlines

74,126

6

Continental Airlines

57,049

China Southern Airlines

69,367

7

All Nippon Airways

33,732

Northwest Airlines

63,872

8

TWA

31,819

US Airways

52,018

9

America West Airlines

25,512

JetBlue

41,395

10

Japan Airlines

16,796

All Nippon Airways

39,098

 

 

 

 

 

Total

1998

2007

Rank

Airline

Millions

Airline

Millions

1

United Airlines

200,421

American Airlines

222,761

2

American Airlines

175,249

United Airlines

191,933

3

Delta Air Lines

166,154

Delta Air Lines

166,209

4

British Airways

116,001

Continental Airlines

130,965

5

Northwest Airlines

107,402

Air France

128,914

6

Continental Airlines

79,778

Lufthansa

122,091

7

Japan Airlines

78,813

Northwest Airlines

117,357

8

Lufthansa

75,438

Southwest Airlines

116,385

9

Air France

74,598

British Airways

113,275

10

US Airways

66,389

Singapore Arlines Ltd

90,901

British Airways' international network is over four times bigger than Qantas' (in terms of seats per week), although a big proportion of BA's international capacity (71%) is short-haul European capacity. Stripping this out, BA is just 25% larger than Qantas in terms of its international network size.

British Airways vs Qantas international network by region (seats per week): Dec-08

BA has roughly twice as many jet aircraft in its fleet than Qantas (though a much larger proportion of narrowbodies). Qantas however has considerably more aircraft on order than BA (106 vs 60), and much more attractive early positions in the crucial B787 and A380 production lines.

Qantas jet fleet and orders: At Dec-08


Aircraft Type

In Service

Order

Grand Total

Airbus

A330

15

1

16

A380

1

19

20

Boeing

747

32

32

767

28

28

787

55

55

737 (CFMI)

18

18

737 (NG)

38

31

69

Grand Total

132

106

238

British Airways jet fleet and orders: At Dec-08


Aircraft Type

In Service

Order

Grand Total

Airbus

A318

2

2

A319

33

33

A320

32

12

44

A321

11

11

A380

12

12

Boeing

747

54

54

757

11

11

767

21

21

777

42

10

52

787

24

24

737 (CFMI)

28

28

Grand Total

232

60

292

Synergies

Both carriers are well into multi-year restructuring and cost cutting programmes. The next step up in cost savings could come from a merger, targeting further cost savings through joint operations, crewing and ground services. Most of the duplication of resources has been removed thanks to the BA-QF Joint Services Agreement, but there are some key revenue synergies through greater network linkages and feeds in their respective markets (European, trans-Atlantic and Asia Pacific) that could be secured.

Fleet

Qantas enjoys some excellent early positions on both the A380 and B787 production lines. A single BA-QF balance sheet could signal joint fleet operations more broadly across their networks. In an uncertain environment, particularly on the international front, added flexibility in the deployment of aircraft would be much sought after by both carriers.

Regulatory path

The two airlines have effectively been operating as one for the past decade on the Kangaroo route, so changes for the regional market from a merger will not be noticeable. The JSA has been subject to ACCC approval and is up for renewal mid next year. Australia's foreign airline ownership restrictions could be eased to up to 49% over the next 12 months (as the government's Aviation White Paper policy statement is finalised).

Jetstar

The BA-QF merger would bring together two premium-focused airlines, while Qantas also brings Jetstar to the table. The successful LCC is an interesting equation and is likely to be a vehicle that is used increasingly in servicing routes from Australia to Europe. There could potentially be a future role for Jetstar within Europe, but it is questionable whether the EU will permit a Jetstar model to operate as a European carrier, if it is not 51% owned by European nationals. But Australia is negotiating with the EU on a comprehensive aviation agreement. BA and Qantas will no doubt be lobbying for a precedent on the ownership question to be created.

CEO alignment

Crucial to the success of any deal will be the personal relationship between the respective airline CEOs. In the case of the Qantas-BA deal, the Irish connection between British Airways CEO Willie Walsh (a former Aer Lingus CEO) and new Qantas CEO Alan Joyce (who also spent eight years at Aer Lingus) is highly important. In light of the BA merger talks, the Qantas board's appointment of Mr Joyce takes on fresh significance. The personal affinity between the leaders could be the 'X factor' in a deal that will likely face considerable hurdles.


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